Producers play waiting game on oil well drilling

DALLAS (AP)  Texas producers are encouraged by higher oil prices, but many are waiting for signs that the increase will stick before they rush out and drill new wells.

Oil prices have surged near a six-month high, fanned by fear that imports from the Middle East could be disrupted by violence between Israel and the Palestinians or a possible U.S. strike against Iraq.

But apparently prices, which topped $25 per barrel this week after falling below $20 late last year, haven't been high enough for long enough to convince skeptical producers.

The number of rigs looking for oil and gas in the United States has fallen nearly 40 percent in the past year and was still dropping last week, according to Houston's Baker Hughes Inc.

Oil companies are waiting for more evidence of an economic recovery in the United States, the world's largest oil consumer.

"They will be looking more at the supply-demand balance than the Iraq situation or the Israel-Palestinian situation that kicks the prices up in the short term," says Jon Marshall, chief operating officer of drilling company GlobalSanta Fe Corp.

Morris Burns, executive vice president of the Midland-based Permian Basin Petroleum Association, said oil prices are too volatile for producers to line up investors or bank financing for new drilling.

"If we had peace today, prices would drop back to $20," Burns said.

Where there are signs of a modest pickup in drilling, observers credit rising natural gas prices, not oil prices.

Gas prices were depressed by a mild winter and two years of heavy production, which increased supplies. But many existing wells are being depleted, and gas prices have risen by more than 50 percent since late January to more than $3 per thousand cubic feet.

Demand for jack-up rigs in the Gulf of Mexico has risen 14 percent since February, according to Houston's ODS-Petrodata Group. Jack-up rigs, which stand on the Gulf floor, are used for gas wells in shallow water.

Some operators are afraid that if they wait, they'll miss the top of the market  the moment when the combination of high prices and low costs for subcontractors will maximize their profits.

Robert Landreth, an independent producer in Midland, said he is hoping to close a deal to drill two oil wells near Levelland. He expects drilling rig owners and oilfield-services companies to raise their prices, cutting into his profit margin.

"We've had a nice run-up in the price of oil over the last 60 days, so people are starting to come out of the woodwork, which just means another frenzy," Landreth said. "It's a heck of a way to run a business."

In Oklahoma's Anadarko Basin, Dallas-based independent TBX Resources plans to start a new gas and oil well near Vici.

Chief executive Tim Burroughs said the well was planned months ago and would be profitable even if gas were $2 per thousand cubic feet.

Oil executives have reason to wonder whether higher prices will last. They need only look back at natural gas prices two years ago.

When gas prices soared to $10 per thousand cubic feet, it had two consequences: Com panies quickly produced more gas, and sticker-shocked customers cut back on usage. Prices plunged by more than two-thirds.

Prices on oil-futures markets have bounced around this week: Up on reports that Iraq would halt exports. Down on Saudi Arabia's comment that it would offset the lost Iraqi supply. And down after the American Petroleum Institute said crude oil supplies grew by a surprising 4.2 million barrels last week.

John Seitz, president and chief executive of Houston-based Anadarko Petroleum Corp., said more volatile prices are now a fact of life in the energy business. He blamed government decisions placing some areas off-limits to oil and gas exploration.

Seitz said Anadarko increases its reserves when prices are weak  by exploring or by acquiring other companies  and ratchets up drilling when prices rise.